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The crypto industry has lost two-thirds of its market capitalization in eight months.
Coinbase Institute Chief Economist, Cesare Fracassi, has opined that the recent crypto market decline is due to market conditions. The economist made his opinions known in a blog post. Fracassi noted the increasing correlation between crypto-assets and traditional stocks.
Crypto Market Decline
The crypto industry has lost two-thirds of its market capitalization in eight months. From an all-time peak of $2.9T, the current market capitalization of crypto assets is less than $1T. While this has sparked fears that crypto is dead in some quarters, others are buying the dip and preparing for a bull trend.
Fracassi believes that the crypto market decline is due to both larger market forces and the inherent weakening of cryptocurrencies. While noting that the adoption of cryptocurrencies increased recently, Fracassi stated its correlation with the traditional market also rose. This increased correlation suggests to many that the financial system will absorb crypto assets.
According to a May newsletter from Coinbase, the risk profiles of Bitcoin and Ethereum have moved from 0 in 2019 to 1 in 2020/2021 and 2 currently. By implication, for every 1% decline in traditional stocks, the crypto assets will decline by 2%. The report also correlated the volatility of the asset to that of natural gas and oil, with fluctuation between 4 and 5%.
The Future of Crypto Assets
Several crypto stalwarts have noted that the correlation of the crypto market with the traditional market is a good sign. Erik Voorhees, co-founder of Coinapult noted that the current crash was the least bothersome to him because of the correlation with the traditional market.
However, Fracassi opined that the future of crypto assets will not be determined by the traditional market. Rather, he expects that it will be determined by the market’s expectation of the future direction of prices. This puts the market direction largely on the shoulders of crypto investors.
If more investors pull out their funds, it suggests that they no longer see a future in cryptocurrencies. Contrarily, if the market sees an increased adoption by institutional and retail investors as it has done in the last five years, then the market outlook will improve significantly.